ACEA S.p.A. (ACE) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. This is the Chorus Call conference operator. Welcome to the presentation of the results of the ACEA Group. [Operator Instructions] At this point, I will hand you over to the IR manager, Ms. Angrisani.

Ladies and gentlemen, good afternoon, and thank you very much for connecting to the presentation of the results as to the 30th of June 2020. The CEO, Mr. Gola; and Mr. Paris, the CFO, will give you the highlights and the results, and then we shall have a Q&A session.

Well, thank you very much, Ira, and welcome to you all, and thank you for connecting to this presentation. Now the Board of Directors approved today the results of the quarter. Our results show a significant improvement versus last year and also versus the second quarter this year despite the health emergency and the problems related to COVID-19. In particular, we witnessed an increase of EBITDA, which was driven by regulated business, which also saw a considerable growth in investments. The main highlights, you see them on Page 2. EBITDA, EUR 569 million, plus 13% versus the first half of 2019. Please note that this growth is also supported by M&A activity and by acquisitions and the consolidations we've made. But net of M&A activities and net of acquisitions and net the impact of the loss of CIP6 in the environment business, the EBITDA grew by 8% organic growth, so very strong trend. EBIT, EUR 277 million, up 7% versus first half of 2019. Net profit, up 1%, EUR 144 million, and this is a different trend versus the first quarter of the year. CapEx, EUR 411 million, up 20% versus the first half of 2019. Let's now look at the key transactions that were completed in the first 6 months of the year. We'll try to summarize them. In January, we issued a bond worth EUR 500 million with a term of 9 years, with the lowest interest rates to be paid by the ACEA Group, 0.50%. And we also signed an agreement to acquire 51% of Alto Sangro Distribuzione Gas, making us stronger in the gas distribution business especially in the Abruzzo region. And for this deal, we received the antitrust approval. And in the next few days, we will close probably the deal. Then we acquired 60% of the Ferrocart group. This is a company that owns 3 companies, Ferrocart, Cavallari and Multigreen company, for the waste management and particular 4 waste storage, treatment and sorting plants, handling 145,000 tonnes per year. Then we acquired 70% of the Simam in May, a leader in the design, construction and operation of liquid waste treatment plants and also in the delivery of environmental and remediation projects, offering integrated high-tech solutions. This company will be very, very important also for our engineering business. And then we continued with the acquisition of photovoltaic plants. We now have a total installed capacity of 45 megawatts of secondary photovoltaic power, and so we will be able to achieve our target that was 50 megawatts in 2022. And then we continued with the development of projects of -- on the primary market. We have already been authorized. We have 40 megawatts that will be getting in operation in the next few months in a pipeline of over 400 megawatts. Then Fitch has confirmed the rating despite the COVID-19 impact. So Fitch confirmed the ACEA's rating of BBB+ with a stable outlook in May despite the downgrade on the Italian debt. And then recently, we got an increase or an improvement of our outlook from Standard Ethics from stable to positive. The rating is EE-. And so we confident that we will be able to improve our rating here as well in the next 12, 18 months. So let's see now the summary of the main drivers of our main business on Page 3. As to the EBITDA, all of the business areas showed to be resilient to the crisis. The group is growing mainly in the regulated business. The EBITDA from regulated businesses account for 86% of all the EBITDA. But also, nonregulated businesses showed the -- and we shall see that later on, showed the quite high level of resilience. As to the critical issue that is the absorption of the net working capital as an effect of COVID-19-related lockdown, the results that we have in the first 6 months are better than the forecast that we shared at the end of the first quarter. If you remember, we expected at the end of the second quarter to have an increase in absorption of net working capital of around EUR 150 million because of COVID, whereas now we are reporting an absorption of net working capital of EUR 120 million. Only EUR 60 million are related to payment arrears from customers, and EUR 60 million are related to a deferred collection of the regulatory items to be almost entirely recovered by the end of 2020. This is what we expect. So on the basis of all this, ACEA is to have a sound financial structure, high liquidity, which allows us to cover all the debt maturities beyond 2024, which is the horizon of the new business plan that we will present in autumn. On the basis of this, we reviewed our guidance, especially the EBITDA guidance considering the results of the first half of 2020. So we raised our guidance, which used to be, before, between 6% and 8%. At the moment, our guidance is that of having our EBITDA grow above 8%. We are not giving you a precise data because we do not know at the moment how much it will be at the end of the year. As to -- or rather, we do not want to share our final target for the year. And then as to CapEx, around EUR 800 million. Perhaps there will be something more because of investments in the regulated businesses. And then net debt, which is confirmed between EUR 3.45 billion and EUR 3.55 billion today. So we confirm the guidance about the net working capital because of the COVID effect, the absorption that can be around EUR 40 million, EUR 50 million, and we'll be able to remain inside this range, perhaps towards the top part or the higher part of this range. Now pages -- we go to Page 6. You see the EBITDA -- so I do apologize. I probably skipped a few pages. Let's see, Page 4, yes. Let's see the executive summary on Page 4. Well, as you know, the -- what have we done within our group to manage the COVID-19 emergency? Well, first of all, we started to take care of the health of all of our employees and we -- immediately, we asked our employees to work from home. Our physical systems proved to be very resilient, and we were capable to make all of our employees to work remotely and our systems very well supported us. Then we wanted, of course, to guarantee the continuity and the efficiency of all the services offered and provided, and we managed to keep -- or we manage to achieve a very high level of quality. Of course, we asked our employees on the field to be present and to continue to work efficiently. The effect of all this is shown by the number of investments that we made in the first half of the year despite the lockdown and despite not being able to open new building sites. We concentrated our investments on the maintenance of our networks, especially the water networks and the power networks. And at the same time, we kept a very strong dialogue with the stakeholders of the group. Then once the critical stage of the lockdown was over, in order to manage safely the return of our employees to our offices, we launched a plan of serological testing on all employees. So far, some 1,900 tests have been carried out. This is very important for the safety of our employees. And we are now launching a return plan, which will be implemented after this summer. We will continue to have the people working remotely and in the offices as well in a very planned manner. Now in this moment, we are certainly very much concerned about what our country is going through. And of course, we are interested in the new decrees that are going to be issued in order to sustain the recovery of this country, which we hope is going to be effective. And it is quite clear that part of the funds that are going to be earmarked and devoted are going to be reserved or devoted to infrastructures, which are part of ACEA's core business. And we know that this will certainly help the country invest in smart cities, electric mobility, water infrastructures to try and reduce the infrastructure gap as well. So we believe that we can simply play a central role in the restart of the country, and we certainly are very much committed in reducing the infrastructure gap, above all, in the water sector especially in the south of Italy. And then we are committed to improving the quality of the services offered and also committed to the ongoing delivery of digitalization. These simplifications decree to simplify bureaucracy, that was issued a few weeks ago. The doubling of the capacity of the Peschiera Aqueduct is included in that decree as a priority project. And so the development of this project will start, and we certainly will have a very active role in that. Now if you go to Page 5 of the presentation, you have the financial highlights of the first half of 2020, which we have already anticipated. Now the profit and loss account is certainly driven by the regulated businesses. And also, nonregulated businesses have recovered. Now you -- then you have to take into account the consolidation of the Fiora Aqueduct. And then we have the new acquisitions that we carried out in particular in the field of environment and the photovoltaic business. Consolidated revenues, EUR 1.622 billion, plus 4.4%. EBITDA, EUR 568.7 million, plus 13.2%. EBIT, EUR 277.4 million, plus 6.6%. And group net profit, EUR 143.8 million, up 0.6% versus the previous year. Now investments are EUR 411 million, up 20%. Now below, you see net debt, as at June 2020, EUR 3.527 billion. And you can see it's up 24% year-on-year. Now if you go Page 6, you see the EBITDA. The EBITDA is now EUR 569 million. 50% is due to the water business. And this percentage is growing and not only because of the growth of the individual companies but also because of the Acquedotto del Fiora, which contributed EUR 31 million. And then energy infrastructure, 36%; trading, 5%; environment, 5%; and then we have minor businesses. Well, this result, as we said before, was also supported by the new acquisitions. And in particular, as you can see on the right table, we have the consolidation of Consorcio Agua Azul, EUR 5 million; and then the consolidation of AdF, EUR 31 million basically; and then Ferrocart/Cavallari/Multigreen, EUR 1.6 million; and then Demap, EUR 2 million; and then [Technical Difficulty] We do apologize. We had a minor technical problem. Let's start from -- again from Page 7, the highlights of the water business. Here, you also have the gas distribution activity. We reached an agreement for the acquisition of 51% of Alto Sangro Distribuzione Gas that we will close in the next few days. As to the EBITDA growth, as we said before, a driver for growth is represented by the growth of tariffs driven by growing investments and the application of the third regulatory period for the period 2020-2023. And last year, we had EUR 17 million of award for the bonus of commercial quality. This year, we don't have this bonus. That was offset by the recognition of new cost components. And then the line-by-line consolidation of Acquedotto del Fiora, AdF, and then the acquisition of Pescara Distribuzione Gas that was closed in March 2019. Now if you go to Page 8 of the presentation, you see the financial results of the energy infrastructure in this period. As to the highlights, we acquired the new photovoltaic plants on the secondary market where we have a total installed capacity of 45 megawatts. And we are close to achieving our business plan target that was 50 megawatts within 2022. As to the primary market, we have already received the authorization for another 40 megawatts that we're building and that will start operations in the next few months. And we have an overall pipeline of 400 megawatts. The EBITDA is growing here by 6.6%. Growth is driven by distribution, plus 7.8%. Generation, we have here 2 effects which offset each other: photovoltaic, which was out there last year with EBITDA of EUR 5 million; and we have a loss because of COVID-19 on the power generation, which suffered both the decrease of energy prices of minus EUR 5 million and a decrease of volumes because of lower rainfalls, negative EUR 3 million. So overall, the generation business is stable, and we managed to make up for the loss related to COVID-19 with the new development of the photovoltaic plants. Page 9, you have the trading business -- or commercial and trading business. Well, here, the EBITDA is around EUR 30 million, very similar to last year, same period, EUR 31.2 million. We continue to grow in this area. Our customer base is growing on the free market and is growing by 19%, 414,000 customers for energy; and 198,000 customers for gas, so growing by 11%. This growth and -- this growth allowed our company to make up for the negative effects of COVID-19 here with strong impacts, EUR 8.6 million less because of the COVID-19 emergency. And these basically are due to EUR 5 million, more or less, to the energy that we had to resell on the wholesale market because it was not used. And so as a COVID emergency effect, we had a decrease of energy consumption and we had to sell the excess energy on the market at a lower price. And then the EUR 3 million decrease of consumption especially in the business segment and then EUR 4 million for gas. And then we have to witness a worsening of the [ RCW ], EUR 4 million, because of the delay in payments -- or the resolution of the delay in payments of the regulated market tariffs. Then Page 10, you see the environment business. EBITDA, EUR 26.2 million against EUR 33.5 million. Please remember that last year in -- we saw the end of the CIP6. And so the overall result is very good because we managed to offset for the EUR 18 million of the CIP6 incentives. Well, that was possible thanks to the acquisition of Ferrocart/Cavallari/Multigreen, EUR 5 million, more or less, in terms of EBITDA. But also, we managed to increase the tariffs and the volumes of waste taken to the waste management plants. The waste management capability has -- had grown considerably, 778,000 tonnes in the first half of 2020 versus 631,000 tonnes in the first half of 2019. At this point, I will hand you over to Mr. Paris that will lead you through the details of the P&L, cash flow and debt.

Well, thank you very much, Giuseppe. And let me now move on to the next page of the presentation. Well, we -- as to the EBIT, as you can see on Page 11, in the first half of 2020, the EBIT grew by 6.6% versus last year. If you look at the different items of the EBIT, we had the growth of depreciation related to an increase in CapEx, especially in the water segment and then the consolidation of Acquedotto del Fiora, basically, as you can see, from EUR 36 million to EUR 43 million of write-down. And then provisions, again, consolidation of AdF. Well, here, you need to take into account that the COVID-19 emergency related to an increase in write-downs for the Acquedotto del Fiora. And provisions -- or here, the difference is basically related to the entry in the consolidation perimeter of Acquedotto del Fiora. Now as to the net profit, the net profit is growing versus the first quarter and versus the same period than last year. Now in order to better understand the difference between this first half and the first half of 2019, it is worth remembering that in the first half of 2019, we had a nonrecurring item related to the stake in Agua Azul Bogotà, EUR 1.5 million. And then we had the presence of CIP6 incentives. While the end of this led to the loss of contribution in the environment business, that had, of course, an impact on the net profit as well of around EUR 13 million. Moreover, we have the impact of consolidation in the first half of 2020 related to Acquedotto del Fiora and the Consorcio Agua Azul, while the impact of this consolidation explain the difference that you see on the net profit. If you go to the next slide, Page 12 of the presentation, here, you see CapEx. We continue to grow our investments in regulated activities, which account for 88% of our investments, and nonregulated businesses investments account for 12%. Now as you can see the detail below, the greatest amount of CapEx was made in the water and energy infrastructure businesses. As we heard from the CEO before, the growth of investments shows the resilience of the group and the capability of the group to focus on investments, which are important for maintenance of the water and energy distribution networks during the COVID-19 emergency. Now the water business saw the investments of EUR 60.9 million. Please remember that here, we have Acquedotto del Fiora, EUR 15.5 million. And then other activities are infrastructure activities like the widening of water pipes or sewage pipes or maintenance activities, which continued during the lockdown period as well. As to the energy infrastructure business, here, we focus on the strengthening and on the renewal of the network. We also continued with the resilience plan. And also, we continued with our activities on the low and medium-voltage networks of the group. As you can see from the detail on the slide, the other lines of business are more or less in line with the last year. Commercial and trading. Here, we had lower costs for customer acquisition because of the -- or related to the lockdown period, where we saw an interruption of the acquisition of new customers. And last year, on the contrary, we had a very strong activity to acquire customers and to launch new IT systems. So major investment activities were made last year here. And now we continued our investments also in the environment business. Although there is a little reduction versus last year, we focused our attention on the San Vittore plant and the expansion of the Orvieto landfill. As to the overseas business, we have a reduction of our investments, which is totally related to the reduced investment in Agua de San Pedro, so lower investments made in the period mainly due to the COVID-19 emergency that was recorded also in those areas. And then we have an increase in investments in the corporate part. It's due to mainly investments on IT projects for the group. Now if you go to Page 13 of the presentation, you see the cash flow and the related details. Well, I can tell you that we are continuing with our activities to limit the absorption of the net working capital. We talked about this before, and we told you which are the items which affect the difference in the net working capital, EUR 120 million of difference which are due to the COVID-19 emergency. EUR 60 million are related to payments in arrears at Acea Energia, and EUR 60 million are related to deferred collection of regulatory items. And we know that this is going to be a temporary issue that will be solved by the end of the year. And then we had needed to record the tax paid -- the income tax paid in the first half of this year, EUR 45 million. Now this is due to the tax deadlines. And last year, those taxes were paid in the second half of the year, not the first half. So if we go to the last slide, which shows the net indebtedness of the group. The net debt at the end of June is at EUR 3.527 billion versus the EUR 3.062 billion at the end of 2019. As Giuseppe said before, on the 29th of January this year, we issued a bond worth EUR 500 million with a fixed rate of 0.5%, and this bond has a 9-year term. Now as you can see, the structure of the debt, 82% is fixed rate, 1.82% is average interest rate, and the average term is 5.85. The average cost of debt is 1.82%. And the rating of the group is stable, outlook stable both by Fitch and Moody's. And Fitch gave us a rating of BBB+ and Moody's, Baa2, both however with a stable outlook. Well, thank you very much.

Thank you. Thank you, Fabio. Thank you, Giuseppe. At this point, we can take your questions.

[Operator Instructions] The first question is by Enrico Bartoli with MainFirst.

I have a few questions to ask. First of all, your guidance. Can you please give us a few details about the drivers that led you to increase guidance versus the previous one? And then I have a few questions about the water business. Can you give us some details about the increase of tariffs in the first 6 months of the year, ATO2 and ATO5 and AdF? And then you mentioned that the new regulatory scheme made up for the loss of a bonus on quality and the recognition of other costs. Can you give us some details about the regulatory changes in the water business? And then a question about supply. There was an increase in the number of customers in the free market despite the COVID-19 emergency. What are the prospects in terms of commercial activity in the second half? Considering that the commercial activity went well in a difficult period, I would expect an acceleration and an impact on margins. Can you confirm this trend?

Well, thank you. Thank you for your questions. We'll take them now. Now let me answer your question about the guidance that we issued. Now going back to the first page, our EBITDA is growing by 13%. But what is more important is the organic growth of EBITDA, which is above 8% in this first half of the year. Now taking into account that net of the growth of the group and the consolidations, the organic growth of the EBITDA of the group is above 8%. And such growth is driven mainly by the regulated businesses. And so we believe that at least in the second half, we will be able to grow the EBITDA similar to the organic growth of the first half. And so we believe that the organic growth, the EBITDA growth within the end of the year, will be above 8%. We are not giving you the precise figure because we are moving in a context which has some variabilities within our business. Now as you said, our commercial activity went well despite the COVID-19 emergency. And going forward, we can have some positive surprise there. What we need to say is that in the commercial business and considering the growth of our customer base, I am confident that we are witnessing an acceleration trend. And so in the second part of the year, we may expect a growth of customers in the free market with better results versus the one we had in the first half. Of course, in the first half, we had negative impacts of COVID-19 and we managed to make up for such an impact. We had to work hard on OpEx, operating costs. So in the second half, we may have to invest a bit more commercially. And so we may see a slight increase of operating costs here because we need to invest, but I'm confident that we shall have growth of our customers so we will be able to bear aggressive commercial costs and advertising costs. And then Fabio will take the other questions.

Now as to the growth of tariffs for the main company, so the group, we can say that at ATO2, 2%; ATO5, 7% in terms of tariff increase; 0%, Gori; and 1.5%, Acquedotto del Fiora, AdF. While it is worth, however, remembering that the tariffs periods are under review and the review is not over but we can consider the data I gave you as the ones that reflect the considerations about the numbers of group. As to the application of the third tariff period and the cost recognition, as we said before, well, the effect here is mainly to be related to the recognition of the sludges and then the -- another thing that was recognized to the ACEA Group is that we are very efficient on costs and we are capable to improve our performance. And we are also working on trying to have commercial costs to be recognized, which will help us to make up for the lack of the bonus.

The next question by Javier Suarez, Mediobanca.

I have 3 questions to ask. The first, you mentioned the role of ACEA in the restart of Italy, especially in the center and in the south of Italy, and your commitment to invest a bit more in the water business. Now can you tell us whether you have made some proposals to government to turn this process into a virtuous process? Now second question, do you see the need to grow your provisions? Now I saw that by the end of the year, you probably will need to grow your total provisions. Can you confirm this? Third, I read in the press about the possibility for the municipality of Rome may transfer a part of AMA activity set to a company controlled by ACEA. How do you see this agreement? Or what do you expect from such a possible agreement?

Thank you, Javier. While it is clear that the recovery fund was approved 2 weeks ago and in this moment, the government is working to define how to use the funds that Europe will give, now we should -- we said we will play a very active role for all the -- with all the institutions to be a part of the process also to provide our skills and competencies and our investment capability to be added to the recovery fund certainly for the construction of water infrastructure in the center and south of Italy but also in all the other businesses that we operate in, basically in the world of the circular economy. Now if the funds are available, the country has to accelerate the process to authorize the building of plants, especially in the center and in the south of the country where there is a shortcoming of plants. But also, we are committed in renewable energy sources, especially photovoltaic. At the moment the incentives are no longer available, the price of energy will not allow Italy to achieve its target for 2030. And so the government will put in place actions to develop renewable source of energy, and we are ready to play an active part, an active role in this process as well. Very rapidly, I'm going to ask -- to answer the question about provisions. Well, we tend to be very, very cautious when it comes to the management of our accounts. Now although we believe that we don't have a big risk when it comes to receivables and we know that most of these credits will be reabsorbed by the end of the year and there will be a little tail for next year, but at the moment, we identified some risk on part of these receivables. And for this reason, we increased our provisions for that. And so if everything goes as expected, we should have a similar amount of provisions for the second part of the year but all -- it all depends on our receivables also. As to your last question about AMA, these are news that appeared in the press, but we have had so far no contacts with the municipalities about AMA.

Stefano Gamberini has another question.

I'd like to have a few questions. The first one, now projects for the solar business, 40 megawatts of new capacity that is going to be installed, but when is it going to be operating? And how much is it costing? And then is it merchant? And then the 400-megawatt pipeline, is this something that you intend to do but in the short term? Or is that medium to long term? I just want to understand how much acceleration power ACEA has in this business. A second question about waste. Now if my calculations are right, like-for-like, there is a decrease in the results by EUR 12 million. You lost EUR 18 million because of the lack of incentives, CIP6. So you made basically a EUR 6 million positive. What is the driver behind this EUR 6 million? And then your guidance for the year, you were talking about EUR 100 million of M&A. In the first part of the year, you already made the EUR 86 million of M&A. What can we expect here? And then my last question. An improvement in the tariffs in the water business better than you expected related to the sludge treatment. Is that something structural? Or is it something which we will not see in the next few years? So basically, is it a one-off? Or is it something that will be there in the next few years in terms of advantage?